Can a 0% mortgage help you buy your home?


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The Independent Online

There’s no such thing as a free loan, but a new deal launched by the Leeds Building Society today is close. It’s offering a new 0 per cent mortgage for three to six months.

The catch? There are one or two, although it’s not the first time the mutual has offered a 0 per cent loan, having first launched one as part of its Welcome range last summer. And while there will be no interest charged during the offer period, repayments will have to be made.

The new wrinkle is that the 0 per cent is being offered on Help to Buy mortgages, the Government scheme which allows potential homeowners to buy a new or existing home with a 5 per cent deposit.

The deal has been launched in conjunction with Barratt Developments, meaning you have to buy one of the developer’s properties to qualify. However, interestingly, on top of the short-term zero-rate option the society has launched a 10-year fixed rate loan, to join its existing two-year and five-year deals.

Jonathan Harris, of mortgage broker Anderson Harris, said fixing for a decade could be a good option. “A ten-year fixed rate option widens the choice available to those taking advantage of the government’s scheme and gives security for a longer period of time. The rate isn’t bad either.”

The decade-long fix is available at 5.16 per cent if you choose three months’ 0 per cent, or at 5.34 per cent if you GO for the six-month option. However, Mr Harris has a warning for those tempted by the longer fix: “It’s important not to fix for longer than you are absolutely sure about or you will have to pay a redemption penalty to get out of the mortgage before the fixed term ends.”

David Hollingworth of London & Country Mortgages is sceptical of the widespread popularity of a decade-long fixed mortgage. “Long-term fixed rates provide great certainty of payment and budgeting security but have always struggled to gain a strong following,” he said. That is partly due to the higher rates and the new home loan is certainly that at almost twice the rate of the Leeds’ Help to Buy two-year fix at 2.5 per cent.

But people are often also put off because of the need to lock in throughout the fix, which can be too restrictive for many. “It’s great to see a lender broaden the product options but the long-term fix may still appeal only to a certain niche,” Mr Hollingworth reckoned.

Looking more closely at the  0 per cent offer, Ray Boulger of John Charcol said: “The combination of no payments on 20 per cent of the purchase price as offered through the Help to Buy Scheme plus 0 per cent interest for three or six months on the balance of the mortgage gives borrowers the option of even lower mortgage payments initially while they kit their new property out.”

Jonathan Harris agreed. “The choice of not paying interest for the first few months will be popular among cash-strapped first-time buyers,” he said. “The money that would have gone on the mortgage can be used to buy furniture or replenish savings which have gone towards the deposit, while you know that the mortgage will be paid off in full by the end of the term.”

So if you want a brand new Barratt home, should you rush for the deal? Mr Boulger said the rates offered are reasonably competitive, “except the five-year rate, where Santander currently offers 3.44 per cent with no arrangement fee, a free valuation and £250 cashback”.

But he warned against choosing a two-year fixed rate under the Help to Buy scheme: “At the moment no lenders are offering viable remortgage options for Help to Buy-type equity share mortgages, unless the purchaser repays the equity share. This means those taking a two-year fix run the risk of having few options at the end of the initial fixed rate.”

The mortgage market is full of complications meaning borrowers should look beyond the headline deals and, ideally, get expert help.

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